Nigeria Financial System – SS3 Financial Accounting Lesson Note (First Term)

A financial system is a system that allows the exchange of funds between financial market participants such as lenders, investors and borrowers. It has four components: financial institutions, financial markets, financial instruments and financial services. It helps to form capital, pool funds, make payments easier and provide liquidity.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Define financial system.
2. List the components of the financial system.
3. State the functions of the financial system.
4. State the features of the money market.

Instructional techniques

• Identification
• Explanation
• Questions and answers
• Demonstration
• Videos from source

Instructional materials

• Videos
• Loudspeaker
• Textbook
• Pictures

What is a financial system?

A financial system is a system that allows the exchange of funds between financial market participants such as lenders, investors and borrowers.

What are the components of the financial system?

The following are the components of the financial system:

1. Financial institutions: they bring firms, investors and borrowers together.
2. Financial markets.
3. Financial instruments.
4. Financial services.

What are the functions of the financial system?

1. Capital formation: the financial system helps to mobilise savings, which leads to capital formation. These savings are made available through banks, households and different financial institutions.
2. Pooling of funds: in a financial system, the savings of people are transferred from households to business organisations. With these funds, production increases and better goods are manufactured, which raises the standard of living of people.
3. Facilitating payment: the financial system offers convenient modes of payment for goods and services. Payment options such as credit cards, debit cards and cheques make transactions quick and easy.
4. Providing liquidity: liquidity means the ability to convert an asset into cash. The financial market gives investors the opportunity to liquidate their investments in instruments such as shares, debentures and bonds.

What is the money market?

The money market deals in short-term loans, generally for a period of less than or equal to one year.

Functions of the money market

1. It maintains a monetary balance between the demand for and supply of short-term monetary transactions.
2. It makes funds available to many units or entities engaged in diversified fields of activity, whether agriculture, industry, trade, commerce or any other business.
3. It provides funds to developing sectors, which helps the growth of the economy.
4. It provides discounting of bills of exchange, which facilitates the growth of trade.

Evaluation

1. What is the financial system?
2. Mention four components of the financial system.
3. State three functions of the financial system.
4. State three features of the money market.
5. State three functions of the money market.
6. State four functions of the capital market.

Assignment

1. Define the money market.
2. Explain any two functions of the financial system.